RIEB Discussion Paper Series No.2025-31

Title

A New Modeling Approach to Help Address the Trump Tariffs

Abstract

In this paper, we show that the existing models and descriptions of the transfer of capital between countries that are provided in international economics are inadequate because they fail to explain the causes of, or the consequences of, persistent trade imbalances and because the assumption that there is a world interest rate, r* at which all countries can theoretically lend or borrow is extremely misleading.Instead, we argue that a more fruitful modeling approach is to regard the world as consisting of a number of regions, each of which has a particular rate of return on capital, which is a function of the local marginal product of capital (MPK). We demonstrate that such a modeling approach can provide some additional insights into who gains and loses from persistent trade deficits and how this might be affected by the Trump Administration's tariff policy.

Keywords

Capital flows; Capital market imperfections; Capital mobility; Capital transfers; Current account deficits; Current account imbalances; Exchange rate; Feldstein-Horioka Paradox; Feldstein-Horioka Puzzle;Financial frictions; Financial market imperfections; Globalization; Goods market imperfections; International capital flows; International capital mobility; International financial markets; Investment; Marginal product of capital; MPK; Net capital transfers; Open economy macroeconomics; Rate of return on capital; Saving; saving-investment correlations; Tariffs; Trade barriers; Trade costs; Trade deficits; Trade frictions; Trade imbalances; Trade policy; Trump tariffs; World interest rate

JEL Classification

E43, F13, F21, F32, F41, F62, G15

Inquiries

Charles Yuji HORIOKA
Center for Computational Social Science and Research Institute for Economics and Business Administration,
Kobe University, JAPAN
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059
Asian Growth Research Institute, JAPAN
Institute of Social and Economic Research, Osaka University, JAPAN
National Bureau of Economic Research, U.S.A.

Nicholas FORD
Wolfson College, University of Cambridge, U.K.